Trump vs. Clinton: What Are the Financial Implications?

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The 2016 race for the White House will be remembered as one of the most unusual and unpredictable in recent memory. The rise of anti-establishment candidates suggests that the course of American politics may have shifted permanently, with Republicans still at odds about whether to embrace a Donald Trump candidacy. On the Democrat side, Bernie Sanders launched an unprecedented campaign designed to instill more social democratic values in the world’s largest economy. Although Sanders fell short, his campaign is likely part of a much bigger push toward social democracy that will resurface in the next election.

That being said, one of the biggest questions about a Donald Trump vs. Hilary Clinton race is what it will mean for the financial markets. For financial market participants, Donald Trump is a much bigger wildcard because he has proven unwilling to follow the same script that propels most candidates to the White House.

Democrat Vs. Republican: Under Which Administration Do Stocks Fair the Best?

On average, US stocks perform better under Democratic regimes. However, this is far from a cause-effect relationship. For example, the presidency of Barack Obama followed the worst economic downturn since the Great Recession. By the time Mr. Obama took office, the market was already in the process of bottoming.

Nevertheless, the S&P 500 Index has averaged a compound annual growth rate (CAGR) of 9.7% under Democratic regimes versus 6.7% under Republicans. US stocks performed extremely poorly under the Republican administrations of Richard Nixon and George W. Bush, which skewed otherwise impressive growth under the likes of Gerald Ford and George H.W. Bush.[1]

In general, the first year of a presidential term produces the lowest average return, with the final year in office being the second lowest. The third year in office normally yields the highest average return. If we take this pattern at face value, 2016 and 2017 can be expected to be weak in comparison to 2018 and 2019.[2]

That history is on the side of the Democrats isn’t the only reason financial market participants prefer Clinton over Trump. Hilary Clinton has received huge donations from Wall Street,[3] a sign that the current status quo would prevail under her administration. It also helps that Clinton is an establishment candidate who is far more predictable than Donald Trump.

The Trump Factor

To say that Donald Trump is a wildcard would be an understatement. He has not only floated the idea of replacing Janet Yellen as Chair of the Federal Reserve, he has expressed disquiet about a stronger dollar.

“I love the concept of a strong dollar, in many respects obviously I like a strong dollar,” Mr. Trump said in an interview with CNBC. “While there are certain benefits, it sounds better to have a strong dollar than in actuality it is.”[4]

While a lower currency may benefit US multinationals, currency intervention could backfire on the Trump administration. That’s because it could easily prompt countries with a history of intervention, such as Japan, China and South Korea, to introduce additional measures to make their currencies more competitive.

In true establishment fashion, Mrs. Clinton has refused to make explicit comments on how to handle currency devaluation.

According to market analysts, one of the biggest potential downsides of a Trump presidency is the uncertainty attached to it. Uncertainty is the bane of the financial markets, and investors react in unpredictable ways when they’re worried about the future. This could trigger additional turbulence for riskier securities, such as stocks.

Another major area of concern for investors about a Trump presidency is trade. Mr. Trump has referenced his growing displeasure about America’s failure to win trades, especially against emerging markets such as China. Mr. Trump is calling for a major overhaul of US-China trade relations. The first step in reforming this relationship is “leadership and strength at the negotiating table,” including not being “too afraid to protect and advance American interests and to challenge China to live up to its obligations.”[5]

The risk of divisions between the United States and its trade partners likely makes Clinton a more desirable option for investors. As an establishment candidate, she has not stated any position that would be considered overly risky for the economy or financial markets.[6]

What the Polls Say

Mr. Trump’s stance on immigration and Muslims has helped him in the polls since the Orlando shooting. A new poll conducted by Reuters/Ipsos showed Mrs. Clinton’s lead narrowed to 10.7 points form 14.3 points following the shooting. Shooter Omar Mateen pledged allegiance to Islamic State while carrying out the attack that claimed the lives of 49 people at a gay nightclub in Orlando. However, evidence has come to light that Mateen was not very religious and voiced support for rival terrorist organizations. He also had anger issues and may have harbored homosexual tendencies.[7]

The United States presidential election takes place on November 8, 2016.

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